Ewein Bhd - What happens if it doesn't get the land in Penang?

26/6/2014 – Ewein Bhd has convened an Extraordinary General Meeting (EGM) for June 27, to seek shareholders approval to diversify into property development.

Presently, Ewein Bhd makes precision sheet metal fabricated parts used in audio, video and acoustic equipment, satellite antennas, electrical and electronics equipment, KVM switches that that allow a user to control multiple computers from one or more keyboard, video monitor and mouse, computer monitors and keyboards.

According to its June 12 circular shareholders will also vote on the proposed property development project of its 60%-owned subsidiary Ewein Zenith Sdn Bhd.

Now, in order to understand the significance of the EGM, you have to know the background to Ewein Zenith Sdn Bhd and a piece of land on the island of Penang:

On October 16, Ewein Bhd incorporated a 60%-owned subsidiary called Ewein Zenith Sdn Bhd.

The remaining 40% stake in Ewein Zenith Sdn Bhd was owned by Zenith Construction Sdn Bhd.

However, both companies transferred their stakes in this subsidiary to other wholly-owned subsidiaries.

On December 13, Ewein Bhd transferred its entire 60% stake in Ewein Zenith Sdn Bhd to its wholly-owned subsidiary Ewein Land Sdn Bhd.

Zenith Construction Sdn Bhd followed suit on December 17, transferring its entire 40% stake in Ewein Zenith Sdn Bhd to a group company called Consortium Zenith BUCG Sdn Bhd.

Now, Ewein Land Sdn Bhd holds a 60% stake in Ewein Zenith Sdn Bhd while the remaining 40% stake was owned by Consortium Zenith BUCG Sdn Bhd.

A few days later, on December 24, Ewein Bhd proposed that Ewein Zenith Sdn Bhd would undertake a mixed development on a piece of freehold land identified as Lot 702 situated in Section 1, Bandar Tanjong Pinang, Daerah Timur Laut, Negeri Pulau Pinang.

Subsequently, Ewein Land Sdn Bhd and Consortium Zenith BUCG Sdn Bhd signed a supplementary agreement on February 27.

That’s when the terms of the agreement were changed drastically.

But more importantly, the changes appear to favour Zenith, not Ewein Bhd.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why were the terms of the acquisition of land tweaked to favour the vendor?

According to the initial agreement on December 24 (page 3), Ewein Land Sdn Bhd was to pay RM 79.8 mln to Consortium Zenith BUCG Sdn Bhd.

The RM 79.8 mln consideration works out to be Ewein Land Sdn Bhd’s 60% share of the acquisition value of RM 133 mln for the land at Lot 702, which Ewein Zenith Sdn Bhd would acquire from Consortium Zenith BUCG Sdn Bhd.

In other words, Ewein Land Sdn Bhd would pay RM 79.8 mln as its 60% share of the acquisition cost of the land for Ewein Zenith Sdn Bhd, whereas Consortium Zenith BUCG Sdn Bhd need not inject cash because it is already contributing the land worth its 40% stake.

So far, so good.

But in the supplementary agreement on February 27, the terms were changed.

Now, Ewein Zenith Sdn Bhd will pay RM 133 mln to Consortium Zenith BUCG Sdn Bhd for acquiring the land.

And how would it raise that RM 133 mln?

Ewein Land Sdn Bhd – which holds that 60% stake in Ewein Zenith Sdn Bhd – would provide a RM 26.6 mln interest-free loan, repayable after the land has been developed.

A further RM 53.2 mln would be raised through loans for which Ewein Land Sdn Bhd will furnish corporate guarantees.

The remaining RM 53.2 mln would be paid after the development of the land.

Interestingly, it has not disclosed how Ewein Zenith Sdn Bhd would raise the final instalment of RM 53.2 mln payable to Consortium Zenith BUCG Sdn Bhd.

In short, Consortium Zenith BUCG Sdn Bhd isn’t contributing anything for its 40% stake in Ewein Zenith Sdn Bhd.

The bottom line is that despite owning just a 60% stake in the joint venture, Ewein Land Sdn Bhd would directly and indirectly pay for the entire cost of acquiring the land.

But any profits from the development of land by Ewein Zenith Sdn Bhd will be shared by its shareholders in the proportion of their shareholdings.

Clearly, the terms of the deal now favour the vendor, Consortium Zenith BUCG Sdn Bhd.

Therefore any reasonable investor would wonder why Ewein Bhd agreed to such a change in the terms.

Question

2. What if Consortium Zenith BUCG Sdn Bhd fails to procure the land at Lot 702?

Consortium Zenith BUCG Sdn Bhd is a special purpose vehicle established to undertake the works for the roads project and the third link (tunnel) project in Penang.

CZBUCG was awarded the contract for the construction, feasibility studies and formulation of a detailed design work of a RM 6.3 bln integrated road transport project comprising a 12 km paired road between Tanjung Bungah and Teluk Bahang, a bypass each between Air Itam and Tun Dr Lim Chong Eu expressway, and between Gurney Drive and Tun Dr Lim Chong Eu expressway, and a 6.5 km undersea tunnel connecting Penang with the mainland in an agreement signed with the Penang State Government on October 6 last year.

These projects are scheduled for completion from 2018 to 2025 (source).

To pay for the works, the Penang State Government will allot 44.5 hectares (110 acres) of freehold land in Tanjung Pinang at about RM1,300 psf to Consortium Zenith BUCG Sdn Bhd.

The piece of land at Lot 702, which Ewein Zenith Sdn Bhd is acquiring, is spread over 3.67 acres and is part of the above mentioned 110 acres of land.

Apparently, the Penang State Government would allot the land to Consortium Zenith BUCG Sdn Bhd over the next 10 years.

But on December 14, The Starreported that it was still not certain if the Penang State Government would allot the land at Lot 702 or Lot 713 to Consortium Zenith BUCG Sdn Bhd.

In the absence of any clarity ever since the news report, we can only wonder what makes Ewein Bhd believe that Consortium Zenith BUCG Sdn Bhd would be allotted the land at Lot 702.

What if things don’t turn out to be as expected? Will Ewein Bhd terminate the joint venture?

Total number of questions in the full story: 8)

We have invited the company (info@tekunasas.com) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do.

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